A Crash Course on Mechanical Royalties – Part 3: The Flow of Licenses and Royalties

Mechanical License

Hello, and welcome back to this ongoing series on mechanical royalties.

In part one, we took a close look at the fundamental principles of what mechanical royalties are and how they work.  In the second part, we jumped in right at the deep end to discuss mechanical royalty calculation for different use cases and in different international markets.  In case you haven’t read these two chapters yet you might want to grab a cup of coffee and do this now.  Some of the lingo presented in this article will make more sense to you once you’re up to speed with the basics of mechanical royalties.

As we have seen in the previous installment, the calculation of mechanical royalties in different markets is a bit of a messy affair. And indeed: transparency and ease of use, it turns out, have never been much of a currency in the wondrous kingdom of mechanicals.

However, the more you know about the ways these specific royalties are shared, the easier it will be for you to claim your proper slice of the pie.  And, with part two of this series having explained just how much you are due for the use of your copyrighted compositions, it is now time to find out how to actually collect your mechanical royalties and make sure they end up where they belong: in your pocket.

Individual vs. Collective Licensing

In an ideal world, you would simply walk up to your friends at iTunes, Spotify, et al. and tell them “Hey y’all, I’m Cousin Jimmy, this song here was written by me.  Here’s my banking details, please transfer my mechanicals directly to this bank account.” Direct deal, direct flow of money, no middlemen – what’s not to love about it?  Well, here’s the thing:

• iTunes, Spotify & co. are just the tip of a whole iceberg of digital music services operating in many different countries. IFPI currently lists more than 400 licensed services in more than 150 territories across the globe. Striking individual licensing deals with hundreds of outlets worldwide on your own would be a crazy amount of work – especially when you should be writing songs instead.

• On the flip side, it wouldn’t exactly be feasible for digital music services to strike individual deals with millions of individual songwriters. Imagine all the agreements, the transaction costs, the costs of user support, etc.  No point in conducting an international business like that.

• Moreover, the digital music business is in constant flux: new services pop up, new use cases are introduced to the market, royalty rates change – all of this comes with a tidal wave of paperwork you’d have to work your way through just to keep your individual licensing up to date. Not much fun to be had here either.

There are different answers to the challenges imposed by individual deals. One is a licensing system called creative commons, in which you can grant different usage rights and enable different usage scenarios for each and every copyrighted composition of yours. However, since this concept plays only a marginal role in the big picture of today’s commercial digital music business, we will put our focus of attention on another system called collective licensing.

Here is how it works:

Instead of each rights holder individually licensing their songs to, and collecting their mechanical royalties from digital music services, songwriters assign these duties to a licensing body. Depending on the territory and the specific rights they deal with, these bodies can have different names: mechanical licensing agencies, collecting societies, etc. The idea, however, is always the same: to reduce the amount of work for both licensee (the composer) and licensor (the digital music service) by pooling a large number of copyrights and licensing them in bulk.

As a result, when a new service enters the market, they do not have to set up millions of individual agreements to clear all the mechanical licenses necessary to offer a significant catalogue of music to their customers. Instead, they negotiate one deal with a collective licensing body and acquire the rights to use the whole catalogue this body represents in one swoop. Similarly, instead of reporting and paying mechanical royalties to millions of individual songwriters, the digital music service pays the sum total of mechanicals due to the licensing body. This agent then splits the mechanicals up among all the individual songwriters and publishers, according to usage, song split rates and a number of mind-boggling calculation schemes.

Mechanical Royalty Agents: Some Key Criteria

“Great,” you might say, “problem solved!”. Well…. sort of. Mechanical royalty societies are a great help in licensing mechanical rights collecting royalties. But as mentioned earlier, not all is just roses and fairy dust in our little kingdom of mechanical royalties and there are a number of criteria to be aware of in collective licensing.

First things first, to enable your copyrights for collective licensing you obviously have to sign up with one of the mechanical licensing agents and grant certain rights for the administration of your copyrights to them. By doing so, you’re effectively outsourcing two rights:

• the right to represent your copyrighted compositions for collective licensing; and
• the right to manage collection of your mechanical royalties for these compositions.

Nothing wrong with that, a licensing body obviously needs a legal basis to represent your copyrights. And, unless you are a superstar artist, by licensing your compositions to a big pool of copyrights represented by an influential licensing body, your bargaining power usually increases as compared to individual licensing.

At the same time, as you might have guessed, there are many different mechanical royalty agencies and collecting societies out there. And since you have the right to choose where to sign up (especially in Europe, it wasn’t always like that) you might want to do a little research before putting your name on the dotted line. In this light, here are some of the key decision criteria to keep in mind:

Content Licensing: Mechanical licensing agents and collecting societies are closely linked to their home territory’s music market, with many of them operating in a monopolistic status.  Since these markets vary greatly in size and volume, so does the size of the catalogues these agents and societies represent. As a result, the voice of the various collecting societies may have different negotiating power when it comes to striking deals with digital music services. Of course, this does not necessarily mean that bigger is better. Also, in every country there are legal frameworks in place that shape the way these deals are structured. But in some cases the individual negotiating strategy of a collecting society does indeed have a huge impact on your potential income as a songwriter. For example, Germany’s GEMA has been holding out of a supposedly unfavorable deal with YouTube for years. As a result, while members of several other collecting societies can (for better or worse) monetize their music in Germany, GEMA members still cannot make any money with their songs on YouTube in Germany, one of the Top-5 music markets in the world.

Technical expertise: Furthermore, collecting societies and licensing agents have different levels of proficiency when it comes to handling the growing wave of reporting data that comes in from digital music services. While some have invested in their data-crunching abilities early on, others still have quite a bit of catching up to do. Again, bigger is not always better, but in any case a bit of research can make a huge difference when it comes to receiving timely reporting and payment of your mechanical royalties.  Start by asking your network of colleagues, friends and industry contacts on their experience with various licensing agents – this can already go a long way and give you a basic feeling for the technical capabilities of a particular agent.

Accounting transparency: The second installment of this series has given us a glimpse into the joyful world of mechanical royalty accounting.  But the inner workings of mechanical royalty calculation at collecting societies or royalty agencies is a different beast and certainly not for the faint of heart.  Many complicated rules for splitting up royalties can make for a dense web of accounting procedures that composers and rights holders have difficulties to see through. Welcome to the jungle! In this light, you might want to have a look at the actual effort that’s put into providing information and transparency on how your royalties are accounted.

Transparency, in this regard, should go beyond slapping a 150-pages .pdf full of legal jargon on some sub-sub-section of the website for you to download. Sure, you can always dive into this at a later point in time, but to begin with, you might want to look out for the following: Is there a FAQ section and is it up to date? Does it provide thorough information on a wide field of questions on royalty calculation? Is the information provided in plain language that’s easy to understand?

Furthermore, don’t forget that transparency also touches the way the actual reporting is presented to you. Do you get a detailed breakdown of the sales accounted for, or are you provided with just a one-pager with a sum-total? Are the reports provided in digital formats with the possibility to dive into the data, or are you only sent a sheet of paper?

Remuneration: collective licensing agents can be non-profit or for-profit companies. Examples of for-profit businesses in the US are companies like SESAC-owned Harry Fox Agency, SOCAN-owned Audiam or AMRA Music, Inc. There is an entry barrier with some of these companies, however, as not all of them will sign deals with individual composers.  As a result, you may have to get a publishing deal first in order to have your content represented by some of these companies.

The non-profit category includes most of the non-US collecting societies, whose statutes usually imply them to run operations under the principle of mere cost-coverage. These collecting societies usually sign deals with both  publishers and individual songwriters.

Either way, the licensing agent will take away a share of your royalties before calculating the payouts, and this cut can be different depending on the financial category (for-profit/non-profit) of the agent. Consequently, it pays off to investigate on how big this share actually is – another good opportunity to check for transparency as mentioned above.

Customer support: no matter how thoroughly you scan for information, there will almost certainly be questions that come up. In this case, look out for contact details to the various departments of a collecting society or licensing agent. Don’t be afraid to call them! It is their job to provide you, their (potential) licensor and customer, with answers to these questions. In many cases, the experience in customer support is a great indicator for the general effort that is put into providing information and transparency on your royalty accounting.

Reciprocal agreements and how the money flows

Now that you have done your research on mechanical licensing agents, you will have noticed that different agents cover different territories. Does that mean you’ll have to sign up with all of them to make sure you can collect your mechanicals in all these different markets?  If so, wouldn’t that be counterintuitive to the whole idea of reducing administrative work for you as a songwriter?  It certainly would, which is why licensing agents and collecting societies have come up with the idea of reciprocal agreements.

Essentially, this means that the licensing agents sign deals to mutually represent each other’s content and, consequently, to collect the mechanical royalties of their affiliate societies’ content in their respective territories of operation. This has two important benefits:

• First, by striking a deal with one of these societies, a digital music service can theoretically clear a license for the “world repertoire” for this particular territory. This is possibly through the assumption that a national collecting society represents all other societies’ repertoire through this system of reciprocal agreements. There are, however, a few notable exceptions to this rule, as some of the major labels have effectively set up their own collecting society to exclusively represent their repertoire in the digital world.

• Secondly, songwriters can rely on the assumption that through this network of reciprocal agreements, their mechanicals are being collected even in markets beyond the “home territory” of the licensing agent or collecting society they have signed up with.

Sounds complicated? Here’s an example to better illustrate how licenses and royalties flow through this network of agreements:

1. Our friend Cousin Jimmy has registered the copyrights to the songs on the new album of his “Psychobilly Allstars” with, say, British collecting society PRS for Music.

2. PRS for Music has a reciprocal agreement with French collecting society SACEM.

3. An “Allstars” fan in France buys the new album on iTunes France.

4. iTunes France has signed a licensing agreement with French SACEM and will report and pay the mechanical royalties due for the purchase of Cousin Jimmy’s album to SACEM.

5. As according to their reciprocal agreement, SACEM will forward reports and mechanical royalty payments to PRS for Music, Cousin Jimmy’s “original” collecting society.

6. British PRS for Music reports and pays out the mechanicals due from the album sale in France to Cousin Jimmy. Ka-chinng!

The details of this example may be different from case to case, as will be the amounts each licensing agent will keep as remuneration to run their operations. But the basic principle of collective licensing under reciprocal agreements is laid out like this.  But by and large, and despite inevitable frictions along the way, this setup has allowed for an effective management of mechanical licensing and royalty payments for a good century.

And now that you ask, here is an overview on, and links to some of the more important mechanical societies in the world:

Country Mechanical rights society
Australia AMCOS
Austria AUSTRO-MECHANA
Belgium SABAM
Brazil UBC
Canada SODRAC
France SACEM
Germany GEMA
Mexico SACM
Netherlands STEMRA
Ireland MCPS Ireland
Italy SIAE
Japan JASRAC
Portugal SPA
Scandinavia NCB
South Africa CAPASSO
Spain SGAE
Switzerland SUISA
UK MCPS (part of PRS for Music)
USA HFA

For more international territories you may want to visit BIEM, the umbrella association of mechanical societies.  Their website provides contact details to the mechanical societies in virtually any country and territory in the world.  Pitcairn Islands, anyone?

Coming up next: B***h better have my money.

Overall, collective licensing has been working successfully for decades, essentially allowing songwriters to register their works, get their music out there and then wait for the mechanical royalties to roll in.  And by doing a little research (like reading these series of articles), you should be able to get a basic feeling for how much you are due in mechanicals.

But oh, the internet.

Countless new music outlets have entered the market, streaming is now actually a thing, the amount of usage data is exploding. And since everybody and their dog now produce music, navigating the ever-growing amount of copyright information has become a daunting task for both music services and licensing agents. Are your mechanicals still being paid the way they should?

Let’s find out in the next installment.

 

2 Responses

  1. Gary Hubbard, CPA

    CMRRA (Canadian Reproduction Rights Association) collects mechanical royalties in Canada. SODRAC only collects for the province of Quebec.

    Reply

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